Third quarter earnings season is still ongoing but if you read closely into the numbers, fundamentals have barely improved, which stand at odds to the heady valuations arising from this stock market rally. On the bright side, JP Morgan and Goldman Sachs reported blowout earnings. However, trading is the name of their game which has little bearings on lending, production and gainful employment in the real economy.
It is unclear how well the balance sheets of the remaining Wall Street bastions stand up to scrutiny when interest rates are raised, mark to market accounting resumed and all the fanciful Fed’s creations (like Primary Dealer Credit Facility, Commercial Paper Funding Facility, Term Asset-Backed Securities Loan Facility, Term Securities Lending Facility Options Program, etc) are withdrawn.
Ben Bernanke is reluctant to raise low interest rates but he has been quick to toast his “success” in saving America and the world from financial meltdown. Bernanke said: “History is full of examples in which the policy responses to financial crises have been slow and inadequate, often resulting ultimately in greater economic damage and increased fiscal costs. In this episode, by contrast, policymakers responded with speed and force to arrest a rapidly deteriorating and dangerous situation.”
While Ben Bernanke’s resolve in throwing money from his helicopter is impressive, history will remember him fondly not for the amount of dollars he can print in record time nor his financial creativity but rather the exquisite timing of his exit strategies. Liquidity injections canot continue indefinitely without leading to massive asset bubbles. The Fed will have to pull the trigger (I hope sooner rather than later) and that will lead to a shakeout for equities, commodities and dollar short-sellers. Read more…